Pages

Tuesday, May 31, 2011

Nothing lasts forever in retailing; anyone younger than 35 probably has no idea what a "blue light special" is and once-popular retailers like Montgomery Ward and Service Merchandise are long gone. Even on a less dramatic level, there is a definite cyclicality to the retail business - few companies can manage their merchandising without missteps for years at a time, and that has been especially true in teen retailing.

That said, it seems like too many analysts and investors are counting American Eagle Outfitters (NYSE:AEO) out of the fight prematurely. True, the company's same-store sales are not good right now, but this retailer is far from a goner and new leadership could be the catalyst to a more significant turnaround. (For background reading, check out The 4 R's Of Retail Investing.)

American Eagle's Disappointing Start to the Fiscal Year

There wasn't much good news for American Eagle to crow about this quarter. Revenue dropped 6% (and missed estimates by more than 4%) as comps fell a surprising 8%. Sales were especially weak in women's merchandise as comps here were down 10% (versus a 5% drop in men's). Online sales were not much help either, as sales rose just 3%.

Like quality management, brands are valuable to a company, but nobody is quite sure how to value them in cold, hard dollars. To that end, investors may want to consider the work done by London advertising giant WPP and its assessment of the most valuable brands in the world. As valuable brands often lead to above-average returns on capital and superior long-term stock market performance, the value of a company's brand is no trivial detail.

A Few Surprises at the Top of the List?
One of the highlights of WPP's latest report on brand value was that Apple has taken the top spot, surmounting Google. Honestly, it seems a bit of a surprise that it took Apple this long to ascend to the top spot, as the iPod, iPhone and iPad, and Apple's retail stores have been grabbing headlines and cover stories in business and tech media for some time now. Be that as it may, WPP assessed Apple's brand value at $153 billion, clearly putting Google and its $111 billion in the rear-view mirror. Perhaps even more surprising was that WPP's estimate of Apple's brand value jumped 84% from the prior year. (For more, see Can You Count On Goodwill?)

It was also interesting to see that the number three, four and five spots went to IBM, McDonalds and Microsoft, respectively. Coca-Cola is number six, while Disney appears nowhere in the top 10. Other anomalies include Wells Fargo appearing higher on the list (16) than Visa (20), American Express (40) or MasterCard(60).

Tech stocks have had a good run and when investors find tech stocks with what looks like a low valuation, they should be cautious. Blue Coat Systems (Nasdaq:BCSI) is a good example of why that is. While this security and WAN optimization company does indeed have multiples well below most tech companies (and the market in general), there is a good reason for that - Blue Coat is one of the least successful players in its markets today and the company is launching yet another organizational restructuring in the hopes of finding a new path to sustainable growth and better market share.

Fourth Quarter as Bad as Expected
Blue Coat warned in early May that this fiscal fourth quarter would be bad, and the stock has been sliding ever since, losing about a fifth of its value. When Blue Coat actually announced those results on Thursday, performance was indeed ugly.

Revenue dropped 9% from the year-ago level and 2% sequentially, led by declines in product revenue of 5% and 21% respectively. Some products did show some growth (PacketShaper was up 7% sequentially, and MACH5 revenue rose 15%), but together those products were only about 30% of sales.

Volatility can be both boon and bane to investors. Traders certainly love it, and savvy value investors learn to appreciate it for the discounts it can create. On the other hand, volatility based on inconstant underlying financial performance makes valuation more difficult and does no favors to the mental health of those who would prefer to be long-term shareholders.

For better or worse, Take-Two Interactive (Nasdaq:TTWO) continues to be a volatile company. While the company has certainly made progress towards more consistent financial performance, progress towards a goal is not the same as achieving that goal. Take-Two may still offer investors the potential for above-average capital gains, but prospective buyers have to ask themselves if they can handle the uncertainty that will go with the possible profits.
A Sweet and Sour End to the Fiscal Year
Take-Two recently decided to change its fiscal year, and the March quarter now represents the end of the company's fiscal year. For the quarter, Take-Two announced that revenue fell 22% to $182 million. Though that certainly does not sound all that impressive, that $182 million is considerably more than analysts expected, as the averaged estimate called for $148 million and the high-end estimate was $170 million. Sales were not driven by any major releases; rather, the company's revenue came from its catalog. To that end, this is an encouraging sign - if the legacy business can produce better revenue, that's a big step towards a more consistent financial performance. (For more, see Power Up Your Portfolio With Video Game Stocks.)

Semiconductors have not been doing well as a group lately, but that does not mean there isn't room for companies with better mousetraps to gain share. As one of those analog chip companies with a better mousetrap, Avago Technologies (Nasdaq:AVGO) is standing out not only for its relatively better stock performance, but also its stronger relative underlying financial performance.

Fiscal Second Quarter Results Show Ongoing Growth
Semiconductor companies have hit an air pocket lately in terms of their growth momentum, but Avago is still growing its business. Revenue rose almost 9% from the same quarter last year and about 2% on a sequential basis, fueled in large part by better results in the wireline business. The wired business saw revenue grow 5% sequentially (and 30% year-on-year), while the industrial/auto business saw 1% sequential revenue growth. Wireless revenue was flat and the company's consumer/computing business was up 3% (though down 38% from last year and a small part of the overall business). (For more, see A Primer On Investing In The Tech Industry.)

Like most tech companies, Avago levered better revenue into stronger profits. Gross margin (GAAP) slipped about 20 basis points on a sequential comparison, but rose nearly four full points from last year. Operating income was a bit more mixed - GAAP operating profits rose 28% from last year (and the margin expanded), but contracted 3% on a sequential basis in large part because of higher SG&A expense (and higher stock option expense within that).

The Street reacted very favorably to Marvell Technology's (Nasdaq:MRVL) first quarter earnings report. Actually, it wasn't the quarterly earnings that anybody cared about, it was the stronger guidance for the next quarter and the evidence that business may have bottomed out. Although there are still some cosmetic risks to the Marvell story in addition to the fact that Wall Street appears to be re-warming to the name, investors may still be able to pick up shares here and look at the price as a bargain.

A Tough Start to the Year
Nobody expected Marvell to have a good first quarter, and Marvell obliged with a pretty pungent set of results. Revenue fell 6% from the year-ago first quarter and 11% from the prior quarter, led by a 30% sequential drop in sales from chips for the mobile and wireless markets. Hard drive controller chip sales also slipped (down 1% sequentially), while networking sales rose 4% (but contributed less than 25% of total sales).

As is pretty typical for tech companies, operating leverage cuts both ways and revenue declines turned into even bigger drops in profitability. Gross margin retreated about 40 basis points from the January quarter (and a point and a half from the year-ago level), and operating margin dropped more than five full points, as operating income fell close to 30% on both an annual and sequential basis.

I've been writing about the markets and individual stocks for a while now, and it always seems like there's something wrong with OmniVision (Nasdaq:OVTI). I remember widespread beliefs that the image sensors that OmniVision makes were destined to become commodities and the company would face ever-shrinking average selling prices (ASPs), margins and earnings.

Well, as it turns out, industry-leading innovation and the lateral spread of a product into new markets and applications is a pretty good remedy to commoditization. Not only has OmniVision become a leader in the chip sensor business, it has benefited from the introduction of new products like smartphones and tablets as well as deeper penetration into older markets like laptops and webcams. (For more, see Omnivision Hosts A Bear Roast.)

With still more markets yet to penetrate (automotive, security and healthcare), will OmniVision get a little love at last?

Monday, May 30, 2011

It is understandable that long-suffering Arena Pharmaceuticals (Nasdaq:ARNA) would react very positively to an almost sign of good news. After all, this company's stock has taken a pounding in the wake of the FDA's rejection of the company's drug lorcaserin for obesity. While any positive news relating to efficacy certainly does not hurt the prospects for refiling the drug application and eventually gaining approval, Thursday's news does not solve Arena's biggest problems.

Is Meta-Analysis the Same as Data Mining?
On Thursday morning, Arena announced data from meta-analyses of three of the trials for lorcaserin. This data was presented at the European Congress on Obesity and indicated that almost half of patients taking two 10mg doses a day saw more than 5% weight loss, more than double the rate of response in the placebo group. More than one-fifth of those same patients saw better than 10% weight loss; nearly triple the response seen in the placebo group.

Unfortunately, most observers are going to regard this data with a shrug. Clauses like "Modified intent-to-treat with last observation carried forward" are tantamount to data mining in many people's eyes, and the FDA has been very aggressive in rejecting such analyses. This is not to say that lorcaserin doesn't work; rather it just seems unlikely that the FDA is going to revise its viewpoint that lorcaserin offers "marginal efficacy" on the basis of a new look at old data (as opposed to a new study showing better outcomes).

With a few big box retailers going under in recent years, it seems fair to ask whether yet another national big box retailer is what consumers really want to see. On top of that, more and more consumers are looking to general retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) or online vendors like Amazon (Nasdaq:AMZN) to buy their electronics. (For related reading, see Analyzing Retail Stocks.)

That is a challenging backdrop for hhgregg (NYSE:HGG) - a regional big box electronics retailer that apparently thinks the nation needs another place to go shopping. Investors should give credit where it's due, though; the company has managed a solid pace of expansion while keeping a clean balance sheet and there just may be room for a truly new mousetrap.

Surprising Good Results Given a Tough Market The best way to categorize hhgregg's fiscal fourth quarter is that the company must have a staff of alchemists on retainer, as this retailer seemed to do a very good job of transforming chicken-you-know-what into chicken salad. Comps were down almost 11% this quarter, and yet the company managed to handily exceed the bottom-line estimate without resorting to shadowy "other" income or suspiciously low tax rates.

Friday, May 27, 2011

It has been a multi-year roller coaster ride for TiVo (Nasdaq:TIVO) bulls, and yet plenty of volatility and uncertainty remains. Not only does the company have several significant IP lawsuits still in progress, but the company is a long way from establishing that it has a business model capable of producing attractive free cash flow in the years to come.

On the other hand, the company has won legal validation for its IP and signed up several major TV partners. With valuable technology and patents, and several large tech companies likely coveting the in-home reach and potential of this technology, TiVo could yet attract some interest from a bidder. As I said, the roller coaster ride isn't over yet.

First Quarter Results Include a Major Win and Significant ConcernsThere is no question that the company's settlement with DISH Network (Nasdaq:DISH) was a dominating factor this quarter. After another legal setback, DISH chose to take a settlement with TiVo - agreeing to pay $500 million in damages, with $300 million upfront and $200 million coming between 2012 and 2017. With that settlement, TiVo was profitable on an accounting basis.

It's common knowledge that the semiconductor industry is cyclical and that any company selling equipment for this industry is going to have its ups and downs. Even so, it almost feels like investors considering Applied Materials (Nasdaq: AMAT) would be better served with a Ouija board or tarot deck. Nobody questions that AMAT is a key player in the equipment used to make chips, solar panels, flat panel displays and so on, but it seems no two analysts or investors can agree on where we are in this cycle and how low the next bottom will be.

A Solid Fiscal Second Quarter
What is certain is that Applied Materials had a solid second quarter. Revenue rose almost 7% on a sequential basis and surpassed the high end of its analyst range. Growth was led by the services and solar businesses, while the core semiconductor business was down about 3% from the prior quarter. Orders were also solid - climbing 7% - with growth everywhere but the solar business and the core chip equipment business matching that overall growth rate.

Going with straight-up GAAP reported results, AMAT saw gross margin improve more than a full point from last year, but come off about 70 basis points sequentially. Operating income was stronger on a year-over-year basis (up 75%), and up strongly on a sequential basis. To the extent that looking at cash flow can help resolve some of the non-cash items that complicate earnings reports, AMAT reported that year-to-date operating cash flow was up almost 26% from the year-ago period. (For more, see Strategies For Quarterly Earnings Season.)

It's not unusual for business partnerships to have their ups and downs, but it looks like the relationship between biotech company Amylin Pharmaceuticals (AMLN) and major pharmaceutical Lilly (LLY) may well be damaged beyond repair. Between Lilly's decision to market drugs from Boehringer Ingelheim, Amylin's decision to sue in response, and the information revealed through court documents that Lilly was apparently not expecting much from Bydureon, it seems as though the days of constructive partnership are over.

Restraining Order Has Only Limited Benefit
Despite nearly a decade of partnership, Amylin recently filed against Lilly, arguing that Lilly's decision to market competing diabetes drugs with the same salesforce that markets Byetta will compromise the company's sales strategy and revenue potential. Although the agreement between Lilly and BI was reached in January of this year, it is likely that Amylin attempted to resolve this more amicably. What's more, prior to the FDA's approval of linagliptin in mid-May, it was more of a theoretical risk anyway.

When a company operates in an industry with razor-thin margins, even the slightest disappointment can send investors into full flight. That, and a jumpy market to begin with, would seem like the best explanation for why Tech Data (Nasdaq:TECD) shares were punished so severely for what was not exactly a disastrous quarter. Although investors should approach this name with caution, value is value, and Tech Data may be worth a look. First-Quarter Results - Europe Looking Soft
Tech Data reported that revenue rose 13% for the fiscal first quarter (and fell about 11% on a sequential basis). That missed the average estimate of $6.4 billion, and it seems as though analysts and institutions were particularly concerned about soft European consumer demand. Revenue from Europe rose 14% (in euros) from last year's level (and 18% in dollars), but it fell 18% on a sequential basis and looked to be weaker than expected by 2-4%. Business in the Americas was likewise better on a year-over-year basis (up 6%), but weaker than analysts had forecast.

These are challenging times for even the best medical technology companies. Insurance companies, hospitals and national governments are pushing back hard on pricing, patient visits are down, and innovation seems stifled between modest clinical progress and a considerably more conservative FDA. Not surprisingly, then, Medtronic (NYSE:MDT) is delivering much less growth than long-term investors are accustomed to, and the near-term outlook is not looking especially strong.

The real question, though, is whether Medtronic can pull out of this rut. Even just a bit more growth at the top line would make this stock a value, but stagnant markets and the turmoil of the transition to a new CEO could keep a lid on the shares in the near term.

A Weak End to the Fiscal YearAnalysts were not expecting a great fiscal fourth quarter, but Medtronic's results were weak nonetheless. Reported revenue was flat on a constant currency basis, though adjusting for the extra week in the year-ago quarter would have bumped the growth rate to 2%. As this quarter shows, foreign sales are becoming increasingly important to Medtronic's growth. Foreign sales were up 7% (constant currency) to just under $2 billion, with emerging market growth coming in at 20%.

Thursday, May 26, 2011

In most respects, these are pretty good days to be in value-oriented retail. Companies like Family Dollar (NYSE:FDO), Ross Stores (Nasdaq:ROSS) and TJX (NYSE:TJX) all are seeing their stocks trade near 52-week highs, and analyst estimates have been an upward match.

That stands in pretty sharp comparison to the shoe sector, where leading value-oriented companies like Brown Shoe (NYSE:BWS) and Collective Brands (NYSE:PSS) (owner of Payless and Stride Rite) are struggling. With Collective Brands reporting a very disappointing first quarter, it is worth asking whether there is something fundamentally different about the shoe business, or whether the absence of institutional demand for these stocks makes for a buying opportunity for value investors.

A Tough Quarter for Several Reasons
Collective Brands announced that revenue for the fiscal first quarter fell a bit more than 1%, which is not so bad until it's considered that the company missed the average estimate by about 5%. Although the company's very profitable PLG Wholesale business saw revenue rise almost 23%, overall company results were hurt by a 9% drop in domestic Payless revenue (which was fueled by a greater than 8% drop in same-store comps). International sales were also weak, as poor performance in Canada pushed the Payless international revenue down by almost 3%.

A curious announcement came out this week when Swiss food and nutrition giant Nestle (OTC:NSRGY) announced that it was acquiring U.S.-based medical therapeutics and diagnostics company Prometheus Laboratories. Nestle will fold Prometheus into its newly formed Nestle Health Science division and likely will guide the company's efforts toward more research into nutrition-based therapeutics as well as areas like metabolism. Although Prometheus' $250 million or so in ongoing annual revenue will not make a major dent in Nestle, it is an interesting deal on multiple levels. (For background reading, see Investing In The Healthcare Sector.)

What Nestle Is Getting

In acquiring Prometheus, Nestle is getting a business that has focused on diagnostics and therapeutics for indications in gastroenterology and oncology. Prometheus recently got approval to sell a Crohn's diagnostic test, and the company sells a variety of drugs for conditions like cancer and irritable bowel disease.

Nestle did not specify the price it is paying for Prometheus. Considering others deals like Novartis' (NYSE:NVS) acquisition of Genoptix, Quest's (NYSE:DGX) acquisition of Celera, and Thermo Fisher's (NYSE:TMO) acquisition of Phadia, Nestle likely paid at least $650 million, but that is purely speculation at this point.

Sanderson Farms (Nasdaq:SAFM) may be one of the best-run protein producers in North America, but that is not worth much to long-term investors, as big institutions run hot and cold on the shares based on the cyclical moves in poultry profitability. With the poultry market perhaps bottoming out and Sanderson's stock already off its lows, is there still time to play the eventual rebound in this business?

A Tough Second Quarter
Sanderson definitely had a tough fiscal second quarter, but it could have been quite a bit worse. Revenue fell 2% this quarter (and rose almost 12% from the prior quarter) as increased production volume was offset by lower pricing. Although whole-chicken prices rose and leg-quarter prices increased on resumed Russian imports, boneless breast prices have been quite weak, and wing prices have plummeted.

At the same time, feed prices continue to march higher. Sanderson reported that feed costs rose 41%, and that pretty much corroborates what has been going on in the grain futures markets (chicken feed is usually about two-thirds corn and one-quarter soybean meal). Unlike Tyson (NYSE:TSN) and Pilgrim's Pride (NYSE:PPC), though, Sanderson Farms does not hedge grain exposure to a large degree.

Wednesday, May 25, 2011

Even though the actual numbers do not support it, it feels like the markets have been down at least 1% every day for weeks. Whether this is just another example of enough people buying into "Sell in May and go away" that it becomes self-fulfilling or not, the reality is that the market is in a shoot-first mood.

When Aruba Networks (Nasdaq:ARUN) gave cautious guidance with its fiscal third-quarter report, it was tantamount to painting a bullseye on the derrière of shareholders and the market punished the stock in due course. With the dust starting to settle a bit, though, it is time to ask whether the long-term growth potential of this name merits the attention of risk-tolerant growth investors.

On its Own, Not a Bad Fiscal Third Quarter
In a vacuum with respect to guidance and expectations, Aruba's third quarter was pretty strong in many respects. Revenue rose 53% and surpassed estimates by more than the usual degree. Growth was again led by product revenue (up 58%), though 3% sequential growth in the U.S. is a bit of a concern - particularly in light of that softer guidance.

Brocade (Nasdaq:BRCD) is not a turnaround situation from a financial standpoint, but the stock has not managed to break out above $10 (and hold it) in almost a decade. Investors once loved the stock, but worries about the company's ability to match yesterday's growth in storage networking and find an interesting path in Ethernet has capped their enthusiasm of late. Now, with fiscal second quarter earnings in hand, the picture is still murky as the company cannot seem to make progress in both businesses at the same time.

Some Good, Some Not So Good in Fiscal Q2
Brocade made some progress in the second quarter, but not as much as investors might have hoped. Revenue rose 10% overall from last year, but was up less than 1% on a sequential basis. Growth was led by the SAN business, which grew 17% from last year, but contracted a bit on a sequential basis. Ethernet was up a bit sequentially, but basically flat on an annual basis.

While the SAN business was helped by good performance in backbones, switches and adapters, the Ethernet business was smacked by a big year-on-year decline in revenue from federal customers, as several deals got pushed out. That federal detail is curious, as the state of the public sector market really seems to be a company-by-company phenomenon; Cisco (Nasdaq:CSCO) is not doing well here either, but Aruba Networks (Nasdaq:ARUN) (not a competitor to Brocade) and Juniper (Nasdaq:JNPR) don't seem to be having the same sort of problems.

Going back to the drawing board is supposed to be a bad a thing - a mark of failure that comes after a plan does not quite work out as expected. For Autodesk (Nasdaq:ADSK), it's just another day on the job for this leading provider of design and digital content software, including the very well-known AutoCad software, which is a leader in drafting, design and architectural drawing.

With the economic recovery in full swing, the question for Autodesk investors now is what the company can do to leverage its extensive brand value into new growth opportunities. The answer to that question may well spell the difference between an underappreciated growth opportunity and yet another well-known, old-school tech stock destined to languish.

A Solid Start to the Year

Autodesk got the year off to a good start. Revenue rose 11%, with license revenue rising 15% and making up more than 60% of total revenue. Looking at the company's segments, there was a pretty remarkable conformity. The platforms, manufacturing and design business all grew around 15% for the period. In contrast, weak infrastructure and commercial construction activity is keeping a lid on the AEC (architecture, engineering and construction) business, and growth here was just 3% for the quarter.

For as long as leading software-as-a-service (SaaS) provider Salesforce.com (NYSE:CRM) posts explosive revenue growth and increasing subscriber figures, investors should not expect most sell-side analysts to ask many pointed questions about the actual profitability and real earnings of this business. What experienced investors - those who have been through a bubble or three - do know is that eventually real earnings and valuation always matter. That makes Salesforce.com a tricky name to like at today's price.

Fiscal First Quarter Earnings - More of the Same
Salesforce.com's fiscal first quarter results really did not break new ground; for a company that has often reported excellent (and above-expectation) growth, this was just another quarter's work well done. Nevertheless, the company did report that revenue rose 34%, with reported subscription revenue up 35%. Moreover, there was good performance across much of the business, including SFA, Chatter and Force.com.

Margins and profitability were more problematic however. Gross profit more or less kept base (on a GAAP basis), as this line grew more than 31%. Operating profit was a different story, though, as the company reported an operating loss due to far higher sales and marketing costs. Even on a non-GAAP basis (that is, excluding the significant impact of stock compensation expense), EPS showed a significant decline.

Canned soup and snack food specialist Campbell Soup (NYSE:CPB) has a well-earned reputation as a defensive name with solid returns on capital. What it does not have, though, is much growth or momentum in the core business. While the company has taken some positive steps to improve its business possibilities, the incoming CEO has her work cut out to convince Wall Street that this is a must-own name in the food sector.

Fiscal Q3 - Minimal Growth, But Solid Profitability
Campbell has been in a growth rut for a while and this quarter was no exception. Total reported revenue was up 1%, but revenue actually contracted about 1% on constant currency basis. Campbell's core business, U.S. soups, sauces and beverages, was down about 8% this quarter, with beverage sales down 9% (on a difficult comp) and soup sales down about 7%. Baking and snack food was a bright side, though, as sales rose 10% on strong performances from brands like Goldfish and Pepperidge Farm.

I was very sad to hear this morning of Mark Haines' passing. As CNBC's Squawk Box started about the same time I started on the Street, he really was the backdrop of Wall Street and financial media to me.

I never got to meet the man, but the byproduct of being on TV so long and being open about your feelings and beliefs is that many people feel they know you. So although he was not a friend or acquaintance of mine, I still feel a loss and believe we are all poorer for his passing, though richer for the work he did.

He's a good model for what financial journalism should be - tough, to the point, and intolerant of nonsense, but fair, approachable, and possessed of the knowledge that you have to have a sense of humor and perspective to keep your sanity.

Search This Blog

About Me

I started this blog as a way of archiving my writing for sites like Investopedia, as well as posting some thoughts on the markets, stocks, or whatever else strikes my fancy.
Feel free to email me.
You can reach me at tuonela (dot) fool (at) gmail (dot) com

Get My Articles Delivered By Email

Followers

Subscribe To

Disclaimer

This blog represents the opinions and views of its author.

Information is taken from sources believed to be reliable but no warranty or guarantee is made with respect to accuracy.

Investing involves risk and requires proper due diligence. In no way should a reader should presume this blog represents personalized financial advice or is a substitute for proper due diligence. The author expects you to be enough of a grown-up to realize this.